Intertemporal Price Discrimination Research Articles

Intertemporal price discrimination with time-inconsistent consumers

We consider the intertemporal price discrimination problem of a durable good monopolist facing a population of consumers who are time inconsistent. We show that price trajectories, profits and welfare are sensitive to consumers’ first- and second-order beliefs regarding their time preferences. Surprisingly, we find that sales and profits are largest when consumers are sophisticated, i.e., when consumers hold correct expectations on their own future choices. The monopolist is thus unable to take advantage of consumers’ naiveté, and could instead benefit from informing consumers about their true preferences and commitment problems, or otherwise communicate its beliefs about them.

Leveraging strategic consumer behavior in consumer-to-consumer resale: From economic and environmental perspectives

To generate profits and support a sustainable environment, forward-looking firms are adapting to the trend of used-product transactions among individual consumers. Incorporating consumers’ strategic waiting and reselling behaviors, we investigate the effects of consumer-to-consumer (C2C) resale platform (CRP) on the market from both economic and environmental perspectives. In a two-period setting, a retailer dynamically sets prices to sell new products and a CRP provides a venue for used-product transactions. Consumers are heterogeneous in their valuations for new and used products, which play a vital role in market formation. Our results indicate that all market participants can profit from the presence of CRP, albeit at the expense of aggravated environmental impact. Specifically, with the CRP sustaining used-product transactions, the retailer intensifies intertemporal price discrimination in most situations. The new-product demand increase in each period, producing a demand-expansion effect, while the new-product prices across periods may either decrease or increase. The demand-expansion effect is sufficiently strong to improve the retailer's revenue when consumers perceive a medium value of used products. Otherwise, the price reduction dominates to worsen the retailer's revenue. The retailer can benefit from the rise of CRP by leveraging consumers’ strategic behaviors, despite competing with it for demand. Importantly, the consumers and the retailer are likely to hold the same preference over the establishment of CRP. In this situation, coupled by the CRP’s revenue received from used-product transactions, social welfare improves with the addition of this market entity, leading to a win-win situation. Nevertheless, the demand-expansion effect arising from the presence of CRP aggravates the environmental impact, contrasting with the ethos of environmental friendliness held by the retailer and the consumers. Moreover, the existence of a disposal option to salvage used products at a positive value makes it less likely for the retailer to benefit from the existence of CRP and leads to a heavier environmental impact.

Intertemporal Price Discrimination via Randomized Promotions

Problem definition: The undesirable but inevitable consequence of running promotions is that consumers can be trained to time their purchases strategically. In this paper, we study randomized promotions, where the firm randomly offers discounts over time, as an alternative strategy of intertemporal price discrimination. Methodology/results: We consider a base model where a monopolist sells a single product to a market with a constant stream of two market segments. The segments are heterogeneous in both their product valuations and patience levels. The firm precommits to a price distribution, and in each period, a price is randomly drawn from the committed distribution. We characterize the optimal price distribution as a randomized promotion policy and show that it serves as an intertemporal price discrimination mechanism such that high-valuation customers would make a purchase immediately at a regular price upon arrival, and low-valuation customers would wait for a random promotion. Compared against the optimal cyclic pricing policy, which is optimal within the strategy space of all deterministic pricing policies, the optimal randomized pricing policy beats it if low-valuation customers are sufficiently patient and the absolute discrepancy between high and low customer valuations is large enough. We extend the model in three directions. First, we consider the case where a portion of customers are myopic and would never wait. We show that the existence of myopic customers is detrimental to the firm’s profitability, and the expected profit from an optimal randomized pricing policy decreases as the proportion of myopic customers in the population increases. Second, we consider Markovian pricing policies where prices are allowed to be intertemporally correlated in a Markovian fashion. This additional maneuver allows the firm to reap an even higher profit when low-valuation customers are sufficiently patient by avoiding consecutive promotions but, on average, running the promotion more frequently with a smaller discount size. Lastly, we consider a model with multiple customer segments and show that a two-point price distribution remains optimal, and our conclusion from the two-segment base model still holds under certain conditions that are adopted in the literature. Managerial implications: Our results imply that the firm may want to deliberately randomize promotions in the presence of forward-looking customers. Funding: This work was supported by the National Natural Science Foundation of China [Grant 72201124], the Natural Sciences and Engineering Research Council of Canada [Grants RGPIN-2015-06757 and RGPIN-2021-04295], and the Youth Project of the Humanities and Social Science Foundation of the Ministry of Education of China [Grant 22YJC630006]. Supplemental Material: The online appendix is available at https://doi.org/10.1287/msom.2023.1194 .

The impact of COVID-19 on airlines’ price curves

COVID-19 has had a major negative impact on the travel industry, especially on the aviation sector. Along with travel restrictions to contain the spread of the virus, a drastic drop in demand—mainly caused by the decrease in the willingness to travel—has also been registered. This study explores the impact of COVID-19 on airline pricing curves, in terms of the price level, price dispersion, and the extent to which intertemporal price discrimination is applied. By analyzing all major European flights departing from and arriving in Italy, the results reveal a 31% overall decrease in airline price per kilometer. Additionally, price dispersion dropped, and price discrimination intensity was found to have decreased as a result of COVID-19. These outcomes can be explained in light of two major impacts of the pandemic on air travel demand, namely the variation in the passenger mix and travelers’ higher price sensitivity. Further analyses indicate that—along with other market and flight characteristics—market concentration, introduced interventions to prevent and control COVID-19, and airline- and destination-types play an important role in determining prices, price dispersion, and the price discrimination intensity.

Dynamic monopoly and consumers profiling accuracy

AbstractUsing a Markov‐perfect equilibrium model, we show that the use of customer data to practice intertemporal price discrimination will improve monopoly profit if and only if information precision is higher than a certain threshold level. This U‐shaped relationship lends support to a popular view that knowledge is good only if it is sufficiently refined. When information accuracy can only be achieved through costly investment, we find that investing in profiling is profitable only if this allows to reach a high enough level of information precision. Consumers expected surplus being a hump‐shaped function of information accuracy, we show that consumers have an incentive to lobby for privacy protection legislation which raises the cost of monopoly's investment in information accuracy. However, this cost should not dissuade firms to collect some information on customers' tastes, as the absence of consumers' profiling is actually detrimental to consumers.

Hidden prices with fixed inventory: Evidence from the airline industry

When a firm can sell multiple units before any price adjustment takes place, three forces may affect the pricing of the inventory over time: perishability drives prices down, scarcity shifts prices up, and intertemporal price discrimination raises prices. Hidden prices arise because each unit, even if not immediately up for sale, is assigned a price. Airline fares collected for the analysis empirically show the existence of each force. The price of each seat tends to decrease over time, except few days before departure; at any point in time, fares are increasing in the sequential order of sale of the seats.

Heterogeneous price adjustments among Airbnb hosts amid COVID-19: Evidence from Barcelona

COVID-19-induced travel restrictions have led to a sharp drop in Airbnb bookings. Confronted with a decrease in demand, hosts have implemented heterogeneous price responses. This study evaluates the different price adjustments developed by professional and non-professional hosts. Considering the city of Barcelona as the case study, I exploit monthly longitudinal data for 24,000 different Airbnb listings observed between June 2020 and April 2021. Using hedonic regressions with listing and neighbourhood fixed effects, I show that professional hosts have reduced prices to a greater extent, especially during the worst months of the pandemic. The findings support intertemporal price discrimination among professional hosts, which seem to adjust prices faster to meet demand and better adapt to market conditions.

Intertemporal Price Discrimination in Consumer Packaged Goods

Intertemporal Price Discrimination in Consumer Packaged Goods

Dynamic pricing and revenues of Airbnb listings: Estimating heterogeneous causal effects

This paper investigates the extent to which the implementation of intertemporal price discrimination affects Airbnb listings’ revenue. We found that on average, a price surge (i.e., increasing the price as we approach the date of service consumption) has an adverse effect on revenue. However, the magnitude of such effect exhibits significant heterogeneity among listings. Through the application of generalized random forests, a causal machine learning technique, we identify exacerbating and moderating treatment modifiers and shed light on the listing dimensions that cause price surges to be particularly detrimental for hosts’ revenues.

Effects of Cost‐Information Transparency on Intertemporal Price Discrimination

A firm’s product‐cost information is increasingly transparent to consumers as the firm itself or third parties publish such information, which reduces consumers’ uncertainty for the product’s cost. Using a dynamic model of firm pricing with forward‐looking consumer choices, this study assesses how cost transparency affects the firm’s intertemporal price discrimination and profit, as well as the consumers’ strategic waiting decisions and surplus. Ceteris paribus, if consumers believe a durable product has a lower cost, they will expect a larger future price drop and tend to delay purchases, impeding the firm’s ability to engage in intertemporal price discrimination. Without cost transparency, consumers may infer products with higher prices to have higher costs, giving a low‐cost firm incentives to mimic a high‐cost firm’s high price to encourage consumers to buy early. In contrast, a high‐cost firm may choose to distort its price to avoid a low‐cost firm’s price mimicry. Cost transparency reveals the product’s true cost to consumers, limiting the low‐cost firm’s ability to mimic prices. Thus, cost transparency will benefit (harm) a firm with a high (low) cost. In equilibrium, cost transparency will increase the firm’s sales volume and induce more consumers to buy the product earlier instead of later, attenuating strategic waiting by consumers. We also find that cost transparency can lead to higher prices and hurt consumers if the firm has a high cost. In expectation, cost transparency leads to higher firm profits and consumer surplus, facilitating a firm’s new product innovation.

Dynamic Monopoly and Consumers Profiling Accuracy

Using a Markov-perfect equilibrium model, we show that the use of customer data to practice intertemporal price discrimination will improve monopoly profit if and only if information precision is higher than a certain threshold level. This U-shaped relationship lends support to a popular view that knowledge is good only if it is sufficiently refined. When information accuracy can only be achieved through costly investment, we find that investing in profiling is profitable only if this allows to reach a high enough level of information precision. Consumers expected surplus being a hump-shaped function of information accuracy, we show that consumers have an incentive to lobby for privacy protection legislation which raises the cost of monopoly’s investment in information accuracy. However, this cost should not dissuade firms to collect some information on customers’ tastes, as the absence of consumers’ profiling is actually detrimental to consumers.

Skimming through search

Abstract I examine a two-period duopolistic market for a durable good where firms compete in prices. Consumers are heterogeneous and can be described according to the following characteristics (i) high valuation and high search intensity; (ii) high valuation and low search intensity; (iii) low valuation and high search intensity; and (iv) low valuation and low search intensity. The market exhibits a new version of the so-called Coasian dynamics. The firms engage in intertemporal price discrimination and only consumers with high valuation and low search intensity purchase the product early. This result is based on a property which dictates that the consumers with high valuation and low search intensity are the most impatient. I call this the skimming through search property. When the difference between the high and the low valuation is small, there is positive probability that the prices in the first period are lower than the prices in the second period, so each firm may set a decreasing sequence of prices in a stochastic sense. Furthermore, when the percentage of consumers with high valuation increases, all consumers pay lower prices. This inter-consumer externality resembles the positive externality caused by an increase in market transparency.

Dynamic Airline Pricing and Seat Availability

Airfares are determined by both intertemporal price discrimination and dynamic adjustment to stochastic demand. I estimate a model of dynamic airline pricing accounting for both forces with new flight-level data. With model estimates, I disentangle key interactions between the arrival pattern of consumer types and remaining capacity under stochastic demand. I show that the forces are complements in airline markets and lead to significantly higher revenues, as well as increased consumer surplus, compared to a more restrictive pricing regime. Finally, I show that abstracting from stochastic demand leads to a systematic bias in estimating demand elasticities.

Intertemporal Price Discrimination with Time-Varying Valuations

Pricing Under Time-Varying Valuations

Is intertemporal price discrimination the cause of price dispersion in markets with low search costs?

ABSTRACT Theories of intertemporal price discrimination imply that prices must be chosen using mixed strategies, with retailers changing their prices randomly over time. Otherwise, consumers will learn which retailer has the lowest price, and eventually, all customers will patronize the lowest price retailer, or all retailers will charge the same price. We test whether price dispersion is explained by intertemporal price discrimination strategies using a dataset of identical products sold through the PriceSpy price comparison website. Our results show that there are clusters of retailers with similar pricing within each cluster, but with different price levels between clusters even after controlling for retailer heterogeneity. Retailers also remain in the same price cluster over time, suggesting that consumers have ample opportunities to learn which retailers belong to which price cluster. Intertemporal price discrimination is thus unlikely to have caused the observed price dispersion.

Synchronizing pricing and replenishment to serve forward‐looking customers

AbstractWe incorporate strategic customer waiting behavior in the classical economic order quantity (EOQ) setting. The seller determines not only the timing and quantities of the inventory replenishment, but also the selling prices over time. While similar ideas of market segmentation and intertemporal price discrimination can be carried over from the travel industries to other industries, inventory replenishment considerations common to retail outlets and supermarkets introduce additional features to the optimal pricing scheme. Specifically, our study provides concrete managerial recommendations that are against the conventional wisdom on “everyday low price” (EDLP) versus “high‐low pricing” (Hi‐Lo). We show that in the presence of inventory costs and strategic customers, Hi‐Lo instead of EDLP is optimal when customers have homogeneous valuations. This result suggests that because of strategic customer behavior, the seller obtains a new source of flexibility—the ability to induce customers to wait—which always leads to a strictly positive increase of the seller's profit. Moreover, the optimal inventory policy may feature a dry period with zero inventory, but this period does not necessarily result in a loss of sales as customers strategically wait for the upcoming promotion. Furthermore, we derive the solution approach for the optimal policy under heterogeneous customer valuation setting. Under the optimal policy, the replenishments and price promotions are synchronized, and the seller adopts high selling prices when the inventory level is low and plans a discontinuous price discount at the replenishment point when inventory is the highest.

Dynamic Airline Pricing and Seat Availability

Airfares are determined by both intertemporal price discrimination and dynamic adjustment to stochastic demand. I estimate a model of dynamic airline pricing accounting for both forces with new flight-level data. With model estimates, I disentangle key interactions between the arrival pattern of consumer types and remaining capacity under stochastic demand. I show that the forces are complements in airline markets and lead to significantly higher revenues, as well as increased consumer surplus, compared to a more restrictive pricing regime. Finally, I show that abstracting from stochastic demand leads to a systematic bias in estimating demand elasticities.

Intertemporal Price Discrimination in Sequential Quantity-Price Games

When firms first choose capacity and then compete on prices in a series of advance-purchase markets, we show that strong competitive forces prevent firms from utilizing intertemporal price discrimination. We then enrich the model by allowing firms to use inventory controls, or sales limits assigned to individual prices. We show that firms will choose to set inventory controls in order to engage in intertemporal price discrimination, but only if demand becomes more inelastic over time. Thus, although typically viewed as a tool to manage demand uncertainty, we show that inventory controls can also facilitate price discrimination in oligopoly.

Intertemporal price discrimination with two products

AbstractWe study the two‐product monopoly profit maximization problem for a seller who can commit to a dynamic pricing strategy. We show that if consumers' valuations are not strongly ordered, then optimality for the seller can require intertemporal price discrimination: the seller offers a choice between supplying a complete bundle now, or delaying the supply of a component of that bundle until a later date. For general valuations, we establish a sufficient condition for such dynamic pricing to be more profitable than mixed bundling. So we show that the established no‐discrimination‐across‐time result does not extend to two‐product sellers under standard taste distributions.

Revenue and yield management: a perspective article

PurposeThis study aims to explain briefly the history and the future of revenue and yield management, offering a graphical visual model to identify the main internal and external elements to be faced by revenue managers.Design/methodology/approachStemming from what happened in the past, the authors predict the key elements in revenue management moving forward.FindingsThe authors discuss four notable emerging themes for a fertile revenue management application: organizational culture; dynamic pricing, both in terms of intertemporal price discrimination and inventory controls; personalized pricing; and distribution channels.Originality/valueThe paper offers informative knowledge to revenue managers and academics working in the area of strategic yield and revenue management.